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Japan Maritime Self-Defense Force (JMSDF) escort ship "Kurama," left, navigates behind destroyer "Yudachi," with a flag, during a fleet review in water off Sagami Bay, south of Tokyo, Sunday, Oct. 14, 2012. (Itsuo Inouye/AP)
Japan Maritime Self-Defense Force (JMSDF) escort ship "Kurama," left, navigates behind destroyer "Yudachi," with a flag, during a fleet review in water off Sagami Bay, south of Tokyo, Sunday, Oct. 14, 2012. (Itsuo Inouye/AP)

INVESTMENT OUTLOOK

Savvy bond maven likes Japanese equities in the long run Add to ...

Bond maven Jeffrey Gundlach, in his investment outlook for 2013, pans U.S. stocks, is agnostic toward gold, and is wildly positive toward Japanese equities, saying they’ll be a far better bet than those in the United States over the long haul.

Mr. Gundlach, the founder of Los Angeles-based Doubleline Capital, is considered one of the savviest fixed income experts in the U.S., ranking in the top 2 per cent of bond fund managers for the portfolio he ran the longest, but he has recently been branching out into other investment areas, hence his calls on everything from commodities to currencies. He bases his investment strategies on a combination of fundamental economic analysis and technical analysis, or the study of market chart patterns.

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Right now, he’s fretting that the European debt crisis is only in abeyance and will flare up again, sooner rather than later. He holds a similar view towards the U.S. and the looming need to raise the federal debt ceiling next month, saying negotiations are “probably going to be uglier even than the fiscal cliff situation.”

In his outlook, provided in a webcast, Mr. Gundlach lambasted European country debt, saying the bonds of safer countries like France and Germany don’t offer much yield, while the riskier peripheral country bonds, such as those of Italy and Spain, don’t offer enough to compensate for the return to crisis conditions on the continent. Investors, he contends, are being far too complacent that the worst of the continent’s financial woes are in the rear view mirror.

Mr. Gundlach would “bet dollars to doughnuts” that Europe’s debt crisis will heat up. “I just don’t believe that the European situation has been resolved in any way.”

While he likes emerging market bonds, he’d be a seller on any rallies because the securities are starting to become overvalued.

Even though he’s worried about the upcoming negotiations over the U.S. debt ceiling, he says U.S. 10-year Treasuries, currently yielding a bit less than 2 per cent, are nonetheless attractive compared with junk bonds and other corporate debt, because they’re less risky than company bonds. He says it’s possible to leverage Treasury positions to get returns similar to the those offered on junk bonds, a trade that entails much less risk because high-yield corporate debt is trading at its priciest level in history.

Given the unresolved debt problems in both Europe and the U.S., Mr. Gundlach expects stock markets to sell off later this year. When they do, it will be the perfect opportunity to load up on Japanese equities, which he says are due for a correction anyway because they’ve vaulted about 25 per cent from their lows.

“I love the Japanese stock market for a long-term investment,” he said. The trade is based on a view that Japanese equities have declined over the past two decades while shares almost elsewhere have soared, suggesting relative value in the securities of the nation.

A more complicated equity-related manoeuvre Mr. Gundlach likes is a paired trade of simultaneously buying the Japanese and Shanghai stock market indexes, while selling short the S&P 500 index.

On gold, Mr. Gundlach observes that the price of the yellow metal has been moving sideways for the past 14 months around current levels of about $1,660 (U.S.) an ounce.

He doubts the price will be stable much longer and is watching for it to break out of its range, one way or the other, before deciding what position to take.

If gold breaks its trend line on the downside, he says it could correct all the way to $1,300 to $1,400 an ounce, yet if it pushes to the upside “it’s quite easy to see it really going very substantially higher.”

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